DLF pulls itself out of its debt trap, but revival in sales is key

Investor reaction to DLF has been positive since news of its debt reduction plans. Graphic: Mint

DLF Ltd’s real estate edifice, which was crumbling under a Rs27,000 crore debt burden (as of September 2017), finally got some respite as promoters infused funds into the firm to repay debt. But it needs to run the last mile successfully before it achieves “net zero-debt” balance sheet by end-FY19.

The consolidated net debt is now Rs5,513 crore, after Rs16,561 crore moved out of its books to DLF Cyber City Developers Ltd. However, investors must note that this is only a transfer after DLF Cyber City ceased to be its subsidiary when DLF’s promoters sold a third of their stake recently to raise funds to repay the burgeoning debt. In other words, if the two figures are combined, DLF group’s debt stands at Rs21,587 crore.

Nevertheless, it’s true that debt was trimmed by a repayment of Rs7,100 crore with promoter funds. DLF is confident of repaying more in the coming months as balance funds from stake sales and other instruments of asset monetization bear fruit.

All this action is at a time when the real estate market is improving regulatory mechanisms and transparency. The company’s strong brand equity in construction and quality of homes appears to have held out through troubled times. Since November, after reopening home sales that were stalled since May due to the implementation of the Real Estate (Regulation and Development) Act, or RERA, DLF has clocked sales of Rs665 crore, not accounted for in the December quarter results.

Net sales were down 17.6% to Rs1,694 crore. Meanwhile, operating profit for the quarter dropped by 21% and margins took a beating on lower sales and higher costs. That said, robust sales in the last two months are encouraging and expected to gain traction in the next quarter.

On the flip side, DLF Cyber City, its rental arm that had robust revenues from lease rentals during the slump in home sales, will no longer add to revenue accretion given its joint venture status. It would only add to DLF’s consolidated net profit (to the extent of equity held). The management in its media release said that the DLF Cyber City business is likely to grow at a compound annual growth rate of 15% for the next 10 years.

In any case, the December quarter’s net profit of Rs4,112 crore is only due to exceptional gain from “fair valuation” of its balance stake in DLF Cyber City.

Be that as it may, the next few quarters are likely to see asset transfers and monetization in DLF and its joint venture reshape the balance sheet. This would in turn determine investor reaction, which has been positive since news of its debt reduction plans.

The key, however, is to see if the strong sales stated by the company in the last two months continues to indicate a revival in the upper-end housing market.